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Citation: 2003TCC506
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Date: 20030801
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Docket: 2002-350(IT)I
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BETWEEN:
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ROGER DUMAIS,
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Appellant,
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and
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HER MAJESTY THE QUEEN,
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Respondent.
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[OFFICIAL ENGLISH TRANSLATION]
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REASONS FOR JUDGMENT
Tardif, J.
[1] This is an appeal concerning the
1999 taxation year.
[2] The point for determination is
whether the respondent was correct in disallowing the appellant
an expense of $23,451 for the 1999 taxation year.
[3] During the 1999 taxation year, the
appellant operated a business under the style and trade name
"Action Rénovation Enr.", a business that
performed construction and renovation work of all kinds. The
appellant moreover had a general contractor's licence.
[4] In its commercial operations, the
appellant's business, as a result of the intervention of a
certain Gérard Tremblay, performed decontamination
work at a residence severely damaged by flooding. The work was
done in cooperation with a specialized firm, "Nettoyeur
Premier". The cost of the work, which was entirely paid by
the Government of Quebec, amounted to $23,450.73.
[5] During that same year, the
appellant, whose place of business was located in his
spouse's residence, paid exactly the same amount for site
clean-up work at the said residence. The work was required
as a result of severe contamination caused by the infiltration of
various liquids stored in one of the three barrels located a few
feet from the residence. The barrels in question had been placed
there in order to recover various substances used as part of the
commercial operations of the business.
[6] At first glance, certain facts,
including the identical amounts of the two invoices, the way the
information was treated from an accounting standpoint and the
fact that the work was done so closely in time were likely to
create a presumption that the decontamination work might possibly
have been personal work benefiting the appellant's spouse,
disguised as expenses of the business operated by the
appellant.
[7] As part of his mandate, the
appellant's accountant reportedly questioned why the same
amount was entered and withdrawn. He soon concluded that it was
probably a contract performed for consideration equal to the cost
of the work, without any profit.
[8] He would normally have had to
account for the income, which would have increased the income of
the business accordingly. He did not do so. However, he did not
conceal the amount in the business's accounting records. He
essentially made entries having no effect on income or expenses
by means of what is commonly called an "In and Out"
transaction.
[9] Although the accounting treatment
was not consistent with good practice, it appears that the
non-compliance with good practice had no effect on the
appellant's tax burden.
[10] Counsel for the respondent focused on
certain inconsistencies in the appellant's claims. First, the
description of the work performed by Nettoyeur Premier was
somewhat awkward in that the work described was not consistent
with the appellant's claims. The invoice was subsequently
corrected or amended to make it consistent with the
appellant's version.
[11] She also noted that the work performed
in August had apparently been done to a large degree in the fall,
when the weather was cold and the work, according to the person
who did it, had to be done with gloves on.
[12] On the other hand, the appellant
explained all the circumstances of the work he had to do or
perform at his spouse's residence where his place of business
was located.
[13] He explained that he and/or his
employees had gotten into the habit of putting trash, hazardous
materials, metals and so on in one of the three barrels. One of
the three barrels contained old oils and various liquid
contaminants.
[14] A number of persons confirmed the
existence of the barrel containing the contaminating solutions.
Mr. Massé, who did the decontamination work with an
employee of the appellant at the time in question, said he had
put contaminants in the barrel, thus confirming its presence. It
became clear during the work that the liquid contaminants in the
barrel were leaking toward the foundation of the residence where
the appellant had his place of business.
[15] The appellant first checked to see
whether the insurance held by his business covered such damage.
After finding out that it was not covered, he decided to assume
the cost of the damage. He stated that he had contacted his
insurer to obtain information on the matter.
[16] This aspect was confirmed by the
testimony of Doris Lamontagne, an insurance broker who
admitted she had received a call on the matter, adding that no
insurance policy covered this type of risk.
[17] The appellant also contended that, if a
claim had been made against his spouse's insurance, she would
subsequently have claimed the amounts paid out for him by means
of a subrogation.
[18] A number of persons testified, each in
the absence of the others. It appears from those testimonies that
a number of the appellant's claims were confirmed on many
details. I refer in particular to the barrel containing
contaminants located a few feet from the residence affected. The
contaminant materials, such as oil, creosote and so on, had been
put there by one of the employees of the business, and they were
materials used as part of the operations of the business.
Photographs also showed that there was a contamination
problem.
[19] This is a case in which the credibility
of the witnesses is a fundamental factor.
[20] Since Mr. Massé, the owner
of the company that performed the work, is deceased, he was
unable to testify or provide his version of the facts.
[21] The point for determination is whether
the respondent was correct in disallowing the appellant an
expense of $23,451 for the 1999 taxation year.
[22] The balance of evidence shows that the
appellant operated a business whose place of business was a
location where he had placed three barrels to recover various
substances as part of the commercial activities of his business.
One of the barrels, the one in the middle, contained various
liquids and contaminants.
[23] The middle barrel containing pollutants
leaked, and part of its contents drained into the soil and into
the basement of the residence where the appellant's place of
business was.
[24] Not insured against the damage, the
appellant decided to bear the cost by means of an agreement with
a business for which he himself had done the work. It was then
agreed between the parties that the two accounts would be set off
against each other since both were for the same amount.
[25] The accounting entries were not made in
accordance with good practice but were not concealed. In actual
fact, the result was the same from a tax standpoint as if the
entries had been properly made, assuming of course that a
business expense was involved.
[26] Progress in this case required the
presence or participation of a number of stakeholders, most of
whom testified. The time elapsed between the moment the damage
was reported and the time the work was done may have explained
certain memory lapses or inconsistencies, but I found that the
appellant's evidence on the important points was generally
more consistent and coherent than the contrary.
[27] Counsel for the respondent indeed noted
the same inconsistencies as the Court. Were these sufficiently
important points to completely discredit the evidence brought by
the appellant? I do not believe so, particularly since those
inconsistencies concerned rather secondary aspects.
[28] The expense was disallowed on the
ground that it was an essentially personal expense.
[29] The basis on which the expense was
characterized was the invoice describing the work performed to
correct a construction defect on the right side of the foundation
at the front of the house (subparagraph 15(o) of the Reply
to the Notice of Appeal).
[30] This was not an interpretation of the
respondent but essentially the description of the work described
and performed by Nettoyeur Premier.
[31] The appellant disputed this premise.
According to the appellant, in order to determine the cause of
the problem, Mr. Massé had asked him a number of
questions. In response to one of those questions, he said he had
performed expansion work requiring that the foundation be
extended. He thought that Mr. Massé had then concluded
that the joint had probably been poorly done and, as a result,
was not waterproof.
[32] Visiting the site and looking at
certain work soon ruled out this first assumption, which, despite
the corrections made by Nettoyeur Premier
(Exhibit I-2), had no effect on the way in which the
respondent treated the expense.
[33] It think it useful to reproduce the
content of Exhibit I-2:
[TRANSLATION]
...
Action Rénovation Enr.
c/o Roger Dumais
2186 St-Albert
Jonquière, Quebec
Mr. Dumais:
As you requested, we are providing you with the information on
the decontamination of your residence.
It was clear during the clean-up at
2166 St-Albert, Jonquière, for Compagnie Action
Rénovation that the spread of contaminants and bacteria
could have originated elsewhere than in the foundation defect
that we had considered the potential source. It is even more
likely that the contaminants may have seeped in through the
basement windows on the right side of the house because the
wooden coping in front of them aids in the formation of bacteria
and put them in a highly vulnerable location, which is also near
barrels stored in the rear.
...
André Massé
General Manager
[34] Despite this correction regarding the
nature of the work, the respondent still claimed that the expense
was of a personal nature.
[35] The balance of evidence shows that the
work had to be done as a result of the infiltration of pollutants
and contaminants stored in a recycling barrel and used as part of
the operations of the appellant's business. The balance of
evidence also shows that there was a causal relationship
(causa-causam) between the storage of the
contaminants, the leak in the container and the damage requiring
repairs.
[36] The cost of the repairs was a
consequence of the damage caused involuntarily within the
operations or commercial activities of the appellant's
business. But does that mean that the expense could be
characterized as having been made for the purpose of earning
income?
[37] The expense in this case was not
incurred as a result of a court judgment or as part of an
out-of-court settlement, which would have clarified the
correlation between the actual damage and the cost paid for
repairs to the damage caused by the infiltration.
[38] This aspect could have been important
if the payment had been made to the appellant's spouse.
Although there was no detailed breakdown of that payment, the
compensation was made between persons dealing with each other at
arm's length, thus reducing the possibility of any benefit. I
will go no further in this direction, particularly since this is
a hypothetical issue.
[39] The balance of evidence shows that the
expense at issue was required to repair damage caused
involuntarily to the appellant's business as part of its
usual current operations.
[40] I conclude that the respondent had no
basis for disallowing the expense, as a result of which the
appeal is allowed and the assessment is vacated, the whole with
costs to the appellant.
Signed at Ottawa, Canada, this 1st day of August 2003.
Tardif, J.
Translation certified true
on this 4th day of August 2004.
Sophie Debbané, Revisor
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